Q: What Are the Different Types of Payroll Deductions?

Payroll deductions are money taken from an employee’s paycheck to pay for taxes, benefits, or other fees.

There are three main types of payroll deductions:

  • Pre-tax deductions and contributions
  • Local, state, and federal taxes
  • Post-tax deductions and contributions

Here’s a quick breakdown of the different types of payroll deductions and how they work:

1. Pre-tax deductions

A pre-tax deduction is money that is taken out of your employee’s gross pay before any taxes are withheld from their paycheck.

Pre-tax deductions reduce an employee’s taxable income, which means they will likely owe less income tax and/or FICA tax (which includes Social Security and Medicare).

Pre-tax deductions can also lower employer-paid taxes, like FUTA (the Federal Unemployment Tax), FICA, and SUI.

Not all pre-tax deductions are the same. Some deductions are considered pre-tax for all taxes, while others may still require certain taxes to be withheld.

Common pre-tax deductions/contributions include:

  • Retirement funds. Contributions to some retirement funds like a traditional 401(k) can be a pre-tax deduction.
  • Health insurance. Health benefits, like health insurance or FSA or HSA plans, may allow pre-tax deductions. If your employee pays for health insurance through a health plan offered at your company, then those contributions could be pre-tax.
  • Commuter benefits. Some commuter benefits are eligible to be pre-tax deductions, within certain limitations.

2. Employee withholding taxes

Federal, state, and some local taxes are withheld from an employee’s pay on each paycheck. These can include:

  • Federal income tax
  • State income tax (in states with income tax)
  • Any applicable local taxes at the city, county, or municipality level
  • Employee’s share of FICA (Medicare and Social Security taxes)

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3. Post-tax deductions

A post-tax deduction is money that is taken out of your employee’s paycheck after all applicable taxes have been withheld.

Common post-tax deductions include:

  • Retirement funds. Some retirement funds are post-tax, like a Roth 401(k).
  • Wage garnishments. If your employee is subject to court-ordered garnishments, then those funds will be removed after their taxes have been withheld.

For an example of where payroll deductions appear on paychecks, watch the video below:

Remember, you don’t have to calculate all this information on your own. Calculating a paycheck can get tricky, so it’s always best to consult a CPA or use a payroll provider to make sure everything is deducted correctly.

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  • Ashley Webb

    If ur wages are garnished how much are they allowed or able to take out?

    • Gusto Editors

      Hi Ashley, since tax rules can vary by location or industry, we recommend talking to a CPA or tax advisor for specific guidance!

  • Jessica T Allison

    Hi, I’m a 30-year-old nurse. I am able to choose whether I want to do pre-tax or post-tax deductions for my retirement plan. Which is better? I’m having a hard time deciding which is more beneficial in the long run.

    • Gusto Editors

      Hi Jessica — we recommend you reach out to a CPA for specific guidance on your situation! We cannot offer legal advice through this medium.

  • Betina Cochran

    Hi. I would like to set up a Christmas Club account with my bank. Do I set that up as a recurring custom deduction in Gusto??

    • Gusto Editors

      Hi Betina — if you’re interested in creating a savings account, you can look into using our Gusto Wallet app (free) to use our paycheck splitter to automatically route your paycheck into different accounts. If you have any further questions, we recommend you reach out to [email protected].

  • Cynthia D Blair

    I have an employee who is having $5 deducted from his pay for the benefit of a food bank. Does Gusto remit that to the food bank or does the company? I have the payroll integrated with QuickBooks Online and the deduction isn’t reflected in the liabilities. Where did it go?

    • Gusto Editors

      Hi Cynthia, if your employee is donating via Gusto Giving, Gusto will remit to the charity of their choice. If you have any further questions, we recommend you reach out to our support team via the Help tab in your Gusto account, as that will be the best way to get your question fully answered.


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